by: Faith Doyle, MBA, CFP®

I am a proud child of the 80’s. My childhood wouldn’t be complete without my trusty Magic 8-ball to answer all my important childhood and teenage questions. You know, all the important stuff I needed guidance on: who I would marry, does the guy I have a crush on like me back, should I get my hopes up about that New Kids (NKOTB for those in the know) concert, and should I crimp my hair or not? As you may have guessed, the Magic 8-Ball wasn’t always the most reliable confidant, and its answers weren’t always the most accurate. Well, in my adult-life I have seen situations where you feel like you’re asking an 8-Ball because the responses are about as reliable. There is no clearer analogous situation than trying to navigate the Social Security Strategy Process on your own or through the Social Security Administration. So, for fun, let’s ask the Magic 8-Ball Some questions relating to Social Security, and then see what a financial advisor thinks.

Before we get too far into our pressing questions for the ever-so-wise 8-ball, let’s have a little background and perspective. So, what exactly is Social Security? It’s an entitlement program that is funded by taxes, paid by employees and employers to cover wages of those who are eligible to receive benefits by reaching a certain age (retirement age), those who are disabled, survivors of workers who have died, and dependents of beneficiaries¹. It was signed into law by President Roosevelt on August 14, 1935². In addition to several other general welfare provisions, the new Act created a kind of social insurance designed to pay retired workers age 65 and over a continuing income after retirement². At the time the Act was signed into law the average life expectancy for a male in the US was 58, and 62 for a female. It was truly to cover one’s end of life². The goal was to prevent the elderly from being homeless when they could no longer physically work².

1. Is Social Security really that important to me? 8-ball says: “Without a Doubt”

The Social Security system reaches almost every family, and at some point, touches the lives of nearly all Americans. According to the Social Security website (ssa.gov) as of June 2019, about 177 million people worked and paid Social Security taxes and about 64 million people were receiving monthly Social Security benefits¹. Social Security was never intended to fully replace a worker’s income, but for 1 in 5 retirees it’s their only source of income. For 2 in 3 retirees, it provides more than 50% of their retirement income. For an average wage earner, it will replace only about 40% of an individual’s working wages³.

Though it’s not meant to be a sustainable plan to rely on Social Security alone, you should not underestimate the importance of it as a source of income within your financial plan. Your interest should be in getting as much money as possible out of the system to which you have paid in over your entire working lifetime. So, yes, Social Security is really that important to you and will help you to retire someday.

• So, do I qualify for Social Security Benefits? 8-ball says: “Most Likely”

As long as you have worked, paid taxes on your earnings, and earned qualifying credits, you will qualify for Social Security. As you work and pay taxes, you earn Social Security “credits”. In 2020, you earn one credit for each $1,410 in earnings (this amount increases annually)- with a cap of 4 credits per year¹. You need 40 credits (at least 10 years of work) to be eligible for benefits¹. This benefit is based on your earnings in the highest 40 quarters (capped at $137,700 per year in 2020)¹. So, if you have higher earnings you will have a higher payout, up to a maximum. Remember, if you took time out of the workforce it could lower your benefit at retirement. This payout is referred to your Primary Insurance Amount (PIA), the maximum payout in 2020 is $3,011 per month, or $36,132 per year³.

• Ok, when do I qualify? 8-Ball Says: “Cannot Predict Now”

Social Security refers to the age in which you qualify for your full benefit as your Full Retirement Age (FRA). As you can probably guess, this has changed as time has marched on. We know that when Social Security was created the age at which you became eligible to receive a benefit was 65. As time as gone by this age has gone up. As of 2020, depending on when you were born your FRA will vary by a few months or more. For instance, if you were born between 1943-1954 your FRA is 66, but 1960 and later your FRA is 67, and there are varying degrees in between³. Filing at FRA assures you receive your full PIA benefit. You can file earlier or later, but your PIA changes, and you could be subject to taxes¹. This is an ever-changing answer, so doing your homework is important here, you want to make sure you know your options and fully understand them.

• So, what’s the best filing option for me? 8-Ball Says: “Reply Hazy, try again.”

If ever an “it depends” answer fit, it would be for this question. There are so many factors to consider: What is your life expectancy? Are you married? Did you make more than your spouse? Are you going to keep working; if so, how much are you going to make? The list is endless. So, let’s look at some of the options:

1. Early filing- You can file as early as age 62 and receive 75% of your PIA. You make more of your PIA by waiting to file closer to FRA, this is based on a reduction factor calculation and based on your proximity to FRA. The biggest take away here: THE REDUCTION IS FOR YOUR LIFE TIME¹, so make sure this choice works best for you before committing to it.
   1. Filing at FRA– Depending on your birth year you can determine your FRA, for those 1960 and later it is 67 for now. This allows you 100% of your PIA¹.
   1. Delayed filing – You can file at any time after FRA and delay up until age 70. You get a raise in your PIA for every year past your FRA and before 70; you get an 8% per year (cumulative, not compounded) “raise” in your PIA. By age 70 it’s a 132% of your FRA PIA payout¹. This can really be worth the wait if you can stand to wait for the income.  
   1. Potential Temporary Payout Reduction – if you are still working or have an income when you file, you could have a temporary reduction in your payout³:  
      1. If you file before your FRA, depending on how early, and how much you make your benefit can be reduced by as much as $1 for every $2 earned over a small earnings threshold. You need to understand what will happen in your particular situation.             
   1. Taxes Oh, and one more thing (in my best Colombo voice, love Peter Faulk): Social Security can be taxed based on a lovely figure called “Provisional Income”. This figure is calculated by adding your Adjusted Gross Income (AGI) to Tax-Exempt Interest (thanks muni bonds) to ½ of your Social Security Benefits. Depending on your filing status and income levels, up to 85% of your benefit could be taxed as income¹.
2. Ok 8-ball, this stuff seems pretty confusing. Is it advisable to try and figure this out on my own? 8-Ball says: “My Sources say no”

As you may already know, Social Security is an important component of a retiree’s income plan. The system is truly complex, and the Social Security Administration will not help you to make the right decision. There are too many individual factors to consider, and that is not their job. As you have read, mistakes can be costly and cause lost benefits forever. I strongly recommend you seek the counsel of a Financial Advisor as the starting point to making your decision, preferably one that believes in financial planning and has a CERTIFIED FINANCIAL PLANNER^TM (CFP®) designation. I also believe that it is imperative to undergo a personalized analysis through a financial advisor. In working with a financial advisor, they can help you pick the most appropriate Social Security strategy for your unique situation.

According to Nationwide, those clients working with a Financial Advisor to plan for Social Security receive 20% more in benefits than those who do not. A 20% increase in benefits can change a lot in terms of your lifestyle³. Yet, only 13% of people have a Financial Advisor who is providing them with Social Security advice, that’s a BIG gap³. You need to find an advisor that does financial planning and will focus on your Social Security strategy.

An advisor can help you make claiming decisions and help you understand available strategies that fit your unique situation. They can potentially help you get more money out of the Social Security system over your lifetime. This type of planning can improve your financial life (without market risk). Without a professional’s help you are subject to the very complex rules and a plethora of misinformation out there. You will be dealing with a reactive organization alone, and you need to be proactive for yourself in your planning. It will be your responsibility to figure out the best claiming decision. If you get it wrong it could cost you in smaller benefits for the rest of your life. So, put down the Magic 8-Ball, and find an advisor that can help you navigate these waters.

About the Author: I am a Financial Advisor and CERTIFIED FINANCIAL PLANNER^TM professional working in the industry since 2015. I work for Webb Investment Services; a private wealth management and investment consulting practice that has been servicing Western North Carolina since 1995. I am passionate about helping people navigate their finances through robust financial planning. To find out more visit our website at www.webbinvestmentservices.com.

Sources

1. https://www.ssa.gov/pubs/EN-05-10024.pdf
2. https://www.ssa.gov/history/briefhistory3.html#:~:text=The%20Social%20Security%20Act%20was,a%20continuing%20income%20after%20retirement.
3. Maximizing Your Client’s Social Security Benefits; General Overview. Webinar. Raymond James. Presented by Bob Spence, CFP®, RICP®
4. Photo credit https://images.app.goo.gl/gNJxNyNbD5cDhb3r8

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Faith Doyle and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation.

Please note, changes in tax laws may occur at any time and have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP®(with plaque design) and CFP®(with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.